7 ways to cut your tax bill

Around half a million more people will be dragged into the higher-rate tax bracket this year, with millions paying more tax overall.

The 45% tax rate was once seen as only affecting the highest earners. But HMRC figures show more than 1.23 million now pay the top rate on their income.

In total, 8.3 million people are in the higher or additional-rate brackets – a 45% rise since tax thresholds were frozen in 2021. And with freezes set to last until 2028, even more will be hit by this so-called ‘stealth tax’.

Here, Which? explains why so many are paying more and shares seven ways to reduce how much tax you pay. 

How many more people are paying tax – and why?

HMRC estimates that there will be around 39.1 million taxpayers by the end of this tax year (2025-2026), an increase of nearly five million from 34.5 million in 2022-23. 

Of these:

• 30.8 million are basic-rate taxpayers (up from 30.4 million in 2022-23)
• 7.08 million are higher-rate taxpayers (up from 5.1 million in 2022-23)
• 1.23 million are additional-rate taxpayers (up from 570,000 in 2022-23)

Tax thresholds have been frozen since 2021. Before the freeze, most would rise in line with CPI inflation. 

This measure, known as ‘fiscal drag,’ means tax bands don’t keep up with rising incomes, pulling more people into higher brackets. It’s often called a ‘stealth tax’ as it raises more money without increasing tax rates.

According to AJ Bell, higher-rate taxpayers now account for almost a fifth of all taxpayers – a bracket once reserved for those on higher salaries.

• Find out more: UK income tax rates 2024-25 and 2025-26

When do you start paying tax?

You pay income tax on the money you earn that exceeds the personal allowance – currently set at £12,570. 

If you live in England, Wales or Northern Ireland, the rate you pay is divided into three bands:

• Basic-rate: Between £12,571 to £50,270 (Paying a tax rate of 20%)
• Higher-rate: Between £50,271 to £125,140 (Paying a tax rate of 40%)
• Additional-rate: Over £125,140 (Paying a tax rate of 45%)

 It’s important to note that Scotland has different tax thresholds from the rest of the UK. 

Regardless of where you live in the UK, your personal allowance will be reduced by £1 for every £2 you earn over £100,000. This means that by the time you earn £125,140, you'll have to pay income tax on all of your income.

• Find out more: how much tax you pay

How many more pensioners are paying tax?

HMRC data shows that 420,0000 more pensioners will be paying tax on their retirement income by the end of this tax year. And it's expected there will be 8.7 million taxpayers in the UK aged over 65 – almost double the 4.9 million in 2010-2011.

This is because your personal allowance covers all your income, including the state pension and any private pensions. In the current tax year, the full new state pension is worth £11,973 a year, while the basic full state pension is £9,175. 

If you receive the full new state pension, you only have £597 of your personal allowance left before paying tax. This means any extra income – from private or workplace pensions, investments, or rental income – would push you over the threshold.

• Find out more: how much state pension you get

7 ways to lower your tax bill

If you've found yourself pushed into a higher tax bracket, there are a few things you can do to legally reduce your bill to HMRC.

1. Top up your pension 

Topping up your pension is a simple way to cut your tax bill, whether it's a workplace or private pension. 

If you're a basic-rate taxpayer, you get 20% tax relief on the money you put into the pension pot. So if you put in £100, it only costs you £80 – your pension provider claims the relief automatically.

If you're a higher or additional-rate taxpayer, you can claim 40% and 45% respectively. Your pension provider will claim 20% for you, but you'll need to claim the other 20% or 25% through a self-assessment tax return. 

This means a £100 contribution only costs you £60 if you’re a higher-rate taxpayer, as you claim back £40 in total.

Putting extra into your pension can also reduce your income so you fall below a higher tax band.

• Find out more: tax reliefs – how to reduce your tax bill

2. Share your allowances 

Marriage tax allowance lets eligible couples transfer £1,260 of their personal allowance to their spouse or civil partner. One of you needs to be a non-taxpayer, and the other must pay the basic 20% rate. Higher or additional-rate taxpayers can't claim it. 

For 2025-26, it reduces the tax bill of the basic rate taxpayer by up to £252. You won’t receive this as a cash payment – instead, it means you pay less tax.

You can also backdate your claim for up to four tax years if you were eligible.

Once claimed, it applies automatically in future years.

• Find out more: marriage allowance explained

3. Claim tax back on your work uniform 

HMRC lets you claim back work-related expenses each tax year. These are costs you have to cover for your job, such as uniforms, tools, travel, or working from home.

For uniforms, you can claim tax relief on the cost of washing, repairing, or replacing them – even if it’s just a branded company T-shirt.

The flat rate allowance for uniform maintenance is £60. This gives you back the tax you’d pay on that amount – £12 if you’re a basic rate taxpayer, £24 if you’re higher rate.

Certain professions, such as nurses, police officers and paramedics, have different allowances and can claim more. 

Once you've claimed, the tax relief should remain in place for future tax years. 

• Find out more: tax-deductible expenses

4. Use your dividend allowance 

If you're self-employed and own a limited company, paying yourself through dividends can be more tax efficient. Dividends attract lower income tax rates than salary, and there are no National Insurance contributions to pay. 

For 2025-26, dividend tax rates are:

• Basic rate: 8.75%
• Higher rate: 33.75%
• Additional rate: 39.35%

There are several disadvantages to this, however. Dividends can only be paid out of profits after corporation tax has been deducted (unlike salary, which is a tax-deductible expense). Plus they don’t count as ‘relevant UK earnings’ for the purposes of tax relief on pension contributions that you make yourself.

• Find out more: dividend tax explained

5. Withdraw your pension cash gradually

You can usually take up to 25% of your pension as a tax-free lump sum when you first access it, up to £268,275. Anything above this is taxed as income.

However, you don’t have to take all your tax-free cash in one go. With phased drawdown, you can withdraw your pension in smaller chunks over time. Each time you take money out, 25% of that withdrawal is tax free and the remaining 75% is taxed as income.

This approach means you can spread out your tax-free entitlement rather than taking it all upfront. It also allows you to manage how much taxable income you take each year, which can help keep you within lower tax bands and potentially reduce the overall tax you pay.

Helen Morrissey, head of retirement analysis, Hargreaves Lansdown said: 'This can be a good option if you are continuing to work part time for instance and need to take a bit of income from your pension. 

'It can also be very useful for those who wish to continue to contribute to their pension because they haven’t accessed the taxable portion of their pension. So they haven’t triggered the money purchase annual allowance, which restricts your annual allowance to £10,000 per year.’

• Find out more: best pension drawdown providers 2025

6. Open an Isa

For those with larger savings pots, or additional-rate taxpayers, an Isa is a great way to avoid paying tax on savings interest or investment income.

You can put up to £20,000 in a cash and/or stocks and shares Isa, and any income generated can grow completely tax-free, protecting your savings now and in the future.

You can also hold up to £50,000 tax-free in premium bonds and – while they don't pay any interest on the money you save – every month you'll be entered into a prize draw with a chance of winning anything from £25 to £1m.

• Find out more: best cash ISA rates 2025

7. Take advantage of savings allowances 

Savings allowances can help cut your tax bill, whether you’re working or retired. 

Basic-rate taxpayers can earn up to £1,000 in savings interest each year tax-free under the Personal Savings Allowance. This reduces to £500 for higher-rate taxpayers, while additional-rate taxpayers don’t get an allowance.

If you're on a low income, you might also qualify for the starter savings rate, which lets you earn up to £5,000 in savings interest tax-free. However, this allowance goes down by £1 for every £1 of other income over your personal allowance limit. 

If you qualify for all three allowances – your personal allowance (£12,570), the starter savings rate (£5,000), and the personal savings allowance (£1,000) – you could earn up to £18,570 before paying tax on savings interest.

• Find out more: best savings accounts 2025